In the world of finance August is not the wicked month; it is July. Or at least that is the usual pattern, for financial crises tend to happen in the run-up to the holiday season rather than during August itself. Why? Well, the not-totally-unfounded reason is that traders in the money markets want to get their books straight before they head off on hols. So they make sure they have no open positions – and that has the effect of bringing any incipient market pressures to the surface. The eurozone crisis this summer has been a case in point. Politicians don't want to hang around in August either, as we have just seen in the US. Do you believe the US government suddenly ran out of money yesterday? Of course not; it could have scrambled on for another fortnight or more. The deadline was in reality set by politics, not economics.
But by any rational standards the political process by which both the US budget deal and the Greek bail-out have been reached are profoundly unsatisfactory. The sight of US legislators clapping each other as though they had done something wonderful is really rather rum. The balance of probability is still that the US will lose its AAA debt rating as this deal does not solve the country's medium-term fiscal problems. As for Europe, Greece may have been bailed out but the way it was done highlighted the plight of the other, weaker, eurozone members. Yesterday the interest rate on Italian 10-year government debt rose to 6.25 per cent, the highest since the euro was created and one that compares with 2.69 per cent for the US and 2.77 per cent for the UK.
Nor, let's be clear, have we anything to congratulate ourselves on here. We may have pulled ourselves back from the brink, but no government in a sophisticated western economy should inherit a fiscal deficit of 10 per cent of GDP or have to carry through the sort of cutbacks that the Coalition faces. This is not reasonable. It is not to get at the previous government to say that we, too, experienced a failure in the decision-making process of our democracy.
So now it is holiday time. The captains and the kings depart. It is a moment to ponder quite what went wrong with fiscal policy just about everywhere and what is to be done about it. For I think in the months ahead, as the tumult of the markets resume and the world economy quite probably experiences some sort of pause in the recovery, there will be an increasing realisation that the West can't go on like this.
The events of the past weeks have undermined the dollar's position, just as the events in Europe have undermined that of the euro. Our own plight is nothing to be proud of. As this reality sinks in and as, in addition, the fiscal cutbacks everywhere take hold, we – and by this I mean the West in general – will have to confront our failure.
Some quite profound thinking will have to go on. I don't believe there will suddenly be agreement on a single developed world fiscal model; more likely we face a decade of experiment before established good practice gradually emerges. But one thing is for sure: we really can't go on like this.Reuse content